Rational Pessimism

By Mike Myatt, Chief Strategy Officer, N2growth

Rational Pessimism

It’s been a few years now, but not so long that you shouldn’t be able to recall the phenomenon of “irrational exuberance” as the commercial real estate market raced towards its peak. We saw even the most savvy of investors start to believe their own smoke, and we watched the amateurs enter the market far too late in the game thinking not only that everybody was invited to the party, but also that the party would never end. What transpired as a result of the frenzy and chaos associated with irrational exuberance was an evisceration of equity that had not been seen in generations.

With this week’s column I’m coining a new phrase which I call “rational pessimism” to describe a mindset impacting today’s current market environment in a different way, but with perhaps a similar impact. The phrase rational pessimism is intended to define the phenomenon that is exactly opposite of irrational exuberance. Unlike the impassioned investors of old who flocked to the market with a herd mentality in times of irrational exuberance, the current herd of unimpassioned investors, infected by rational pessimism, are simply choosing to stand on the sidelines waiting for markets to stabilize and return to normal. You see, one phenomenon impacts investors during robust markets while the other impacts them in down markets. Both of these phenomenons are plagued with flawed logic based on extreme positions, and both equally work against healthy markets. Irrational exuberance accelerates market decline, and rational pessimism slows market recovery.

So, is it rational to be pessimistic in today’s market? With virtually every piece of economic data that hits the market being negative, sure it is (thus the name)…But however well reasoned rational thinking may be, it isn’t always right thinking. A market simply cannot recover without participation. A dormant market can only be jump started by investing, lending, building, buying, etc., so as rational as your pessimism may be, it isn’t managing your risk. Your rational thinking is sadly only exacerbating your problem.  

Let me be clear…I’m not asking you to throw caution to the wind, but rather to break from the herd by using contrarian instincts to capitalize on significant opportunities that do exist for those willing to pursue them. Real players don’t manage risk nearly as much as they exploit opportunity. Look back at any down economic period and it is not those who take a flight to safety and sit on their cash that increase their net worth, it is those that take their cash and make astute investments while their competition is parked in a safe harbor that win big. By getting off the sidelines and back into the game you’ll not only be helping yourself, but you’ll be doing the one thing that truly will make a difference in the market…you’ll be making a market.